RSS feedsAs an enterprising accountant looking at new borrowing or investment alternatives for clients, consider peer-to-peer lending. In the UK, one company in particular is bringing the concept of micro lending to the masses via its website, www.zopa.com, bypassing traditional banks and providing a new asset class for retail investors.
Zopa stands for ‘zone of possible agreement’, referring to the range of mutually agreeable terms and prices between buyer and seller. Launched in March 2005, zopa.com now has more than 75,000 registered members – 60% borrowers, 40% lenders – who borrow and lend from each other directly at rates that undercut mainstream competition.
James Alexander, co-founder and chief operating officer, says: ‘Our growth, especially among lenders, is generated by the press and by word of mouth, and many borrowers find us through internet searches or on supermarket.com and uswitch.com. We now have a US operation and are looking at a franchising approach in 50 other countries. Forrester Research agrees that peer-to-peer lending is here to stay, so we will face competition eventually.’
Zopa’s marketing pitch focuses on how it cuts out insensitive, profit-gouging banks as middlemen, and promotes socially responsible borrowing and lending. ‘No bank in the middle, no huge overheads, no unethical investments,’ it states. ‘Zopa is for people who are looking for a better rate of return. The company’s interest rates aren’t squeezed by middlemen (the banks) because there are no middlemen.’
Zopa earns its money by charging an annual 0.5% lender fee and a 0.5% fee from borrowers on each loan. It also receives a commission for referrals of borrowers who purchase credit insurance.
So, should you recommend Zopa to clients? Consider that borrowing rates can be as low as 4%, while lenders are earning an average of 7% gross (5.6% after expected bad debt), which is significantly better than a bank deposit. Lenders’ money on deposit with Zopa earns 3.25% per annum. While average borrowing is £5,000, and average lending is £3,000, the limit is £25,000.
A Zopa loan, therefore, could be a valuable source of start-up capital for a clients’ entrepreneurial ventures, providing the borrower has other income to repay the loan. According to Alexander, Zopa does not lend directly to businesses and will look to the individual, not to business cashflow, for repayment.
For clients who invest, you can say this is a serious company founded by experienced senior bankers, risk-management and IT professionals. Zopa risk director Karen Wilshire, former director of consumer risk at Abbey National, has 25 years of credit experience. Its chairman, Philip Reese, is the former chief operating officer of Amex USA.
In addition to FSA authorisation, Zopa holds consumer credit licences from the Office of Fair Trading, is a member of the Finance and Leasing Association, and member of CIFAS and National Hunter, the UK’s leading anti-fraud associations.
Borrowers are vetted by credit reference agencies such as Equifax, Experion and CallCredit, and delinquencies are referred to a collection agency. Risk to the lender is limited by spreading the loan among at least 50 borrowers. The maximum amount any one lender is exposed to is £200. Each borrower, therefore, receives money from a number of lenders, in £10 increments. So far, in Zopa’s 16-month history, loan losses are only 0.05%.
For clients who favour ethical investments, Zopa has taken its credo of socially responsible lending into a new venture with Notting Hill Housing Trust, ensuring social housing residents better access to affordable loans. Alexander says this programme is a better form of social lending. ‘We look to ensure a borrower can comfortably service a loan. Put simply, people should be able to get a loan if they’ve proven to be reliable in the past,’ he says.
TOP TIPS
Getting started
Register on Zopa website. Set up holding accounts via Royal Bank of Scotland.
Agree to terms and conditions.
Accredited Lenders
Deposit money, from £500 to £25,000, into Zopa holding account. Choose lending
criteria: what lending rate; loan value between £500 and £25,000; and tenor of
loan 6-60 months.
Approved Borrowers
Shop for loan, between £1,000 and £15,000. Place confirmed bid for cheapest
money on offer.
Zopa Marketplace
Generates loan contract by matching loan offers with confirmed bids. Details are
displayed in MyZopa pages.
Money is transferred next business day to the borrower, who is charged the
average rate of the offers.
Repayments are made via direct debit from the borrower’s bank account to the
lender’s holding accounts.
Lenders can either withdraw the money or re-lend it.
Alan Reiter is a freelance journalist and former investment banker
